On 23 June 2016, the United Kingdom (UK) voted to leave the European Union (‘Brexit’). The UK Prime Minister Theresa May plans to complete this process by March 2019.

The referendum result had considerable short-term impact on financial markets around the world – for example: the British pound hit a 31-year low exchange rate of US$1.32, S&P downgraded the UK to an AA credit rating (from AAA), and the NZX50 index fell 2.3 percent in the immediate aftermath of the vote.

We outline the economic links between New Zealand and the UK in this article.

New Zealand had $32.7 billion invested in the UK at 30 June 2016. This was 14 percent of New Zealand’s total investment abroad ($227.7 billion). At the same time, the UK held $76.6 billion of investment in New Zealand, 20 percent of the total.

New Zealand’s investment in the UK includes controlling investment in UK enterprises (direct investment), loans to the UK, and portfolio investment.

”Over a fifth of New Zealand’s investment in the UK at the end of June 2016 was portfolio investment,” international statistics manager Jason Attewell said. “This includes investment that’s made on behalf of New Zealanders who have funds in superannuation or KiwiSaver schemes.”

The UK has grown in significance as an investment partner over the past decade, both in terms of New Zealand’s total investment abroad and foreign investment in our country.

The change in the exchange rate after the referendum had an immediate effect on New Zealand’s international investment position (our balance sheet with the rest of the world). The fall in the value of the British pound against the New Zealand dollar reduced the value of our assets (our investment in the UK).

Despite the exchange rate changes at the end of June 2016 affecting the value of our assets and liabilities, an increase in our level of investment in the UK and investment from the UK in New Zealand meant the overall value of investment was still up from 31 March 2016 – up $0.4 billion for assets and $2.3 billion for liabilities.

The fall in the pound’s value meant that New Zealand’s portfolio investments in the UK were worth less in New Zealand dollars, and the value of portfolio investments held by the UK in New Zealand were worth more in pounds. The value of portfolio investment increased overall as the level of portfolio assets and liabilities rose over the quarter.

Our trade in goods and services with the UK

The future impact of Brexit will be apparent on the value of our export and imports of goods and services trade with both the EU and the UK. For the year ended June 2016, our total exports to the UK were worth $3.1 billion, and our total imports from the UK were worth $2.2 billion.

In the three months ending March 2016, goods going to the UK accounted for 33 percent of our exports to the EU (in actual terms). This fell to 26 percent in the three months to June 2016. For imports in the three months to March 2016, goods from the UK accounted for 16 percent of our imports from the EU; this fell to 15 percent in the three months ending June 2016. Our top export commodities to the UK were lamb and wine, while our top imports were motor vehicles.

In the June 2016 year, the EU was our second-largest services export destination and import source. The UK accounted for 44 percent of the NZ$3.4 billion in services that we exported to the EU, and for 28 percent of the NZ$3.1 billion in services imported from the EU.

The fall in the value of the pound makes New Zealand’s imports from the UK relatively cheaper, while making our exports to the UK more expensive.

When the UK removes itself from the EU grouping, the EU will be New Zealand’s fourth-largest services export destination and our second-largest services import partner; the UK will be our fifth-largest services export destination and the fifth-largest services import partner.